Thursday, September 19, 2013

World Industrial Production: The Long Recovery in the Developed World

I'm currently writing an article about post(?)-crisis globalisation and I'm focused at the moment on the idea of decoupling. Supporters of the decoupling thesis argue that Asia or emerging economies are now considerably less reliant on the West for their growth.

Having read Eichengreen and O'Rourke's article tracking the global financial crisis (or Great Recession) against the Great Depression I was interested to see what had happen to industrial production. The authors did a couple of updates to the original 2009 article, but finished updating in 2010 when it was clear that the world economy was not continuing to track the GD, largely because of considerable state intervention that helped to bolster economic growth and avoid beggar-thy-neighbour economic policies.

Looking for recent stats on industrial production I came across this research from Yardeni Research.

The figures are quite staggering and show how badly developed economies have performed in comparison to developing (emerging) economies.

In the first graph, which covers the entire world minus construction, the impact of the financial crisis is clear as is the excellent performance in the lead up to the crisis.

But it is when we disaggregate IP that we get a clearer picture of the impact of the crisis.

Compared to Europe the United States has done reasonably well. Even Germany the so-called success story of Europe has not recovered to its pre-crisis peak.

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While the developing world - especially Asia - has clearly outperformed Western economies, the
danger is that the impact of the crisis has simply been delayed in emerging economies and that they now face a period of retrenchment as investment (especially state-directed) slows and debt has to be repaid. Developing countries have benefitted from global supply chains involving China and the spur to their own investment from Chinese investment.

The idea that stimulus - especially in China - would enable emerging economies to ride out the crisis is ultimately dependent on renewed global growth, especially in the developed world. The US and European economies are still the major source of final demand for many of the goods made in the developing world often through regional production structures and global supply chains.